Government tax free bond fails to stem shilling’s decline

The shilling slipped to a nine-month low to exchange at 102.50 units against the US dollar yesterday. This despite move to tap foreign inflows through a surprise infrastructure bond.

Central Bank of Kenya (CBK) this week sold a 20-year Sh50 billion tax-free bond, which is popular with foreign investors, in hope that the inflows would stem the shilling’s fall.
“The consultative forum for domestic debt sits today and speculation is still rife that they may issue an infrastructure bond in a bid to attract foreign inflows to stem the assault on the local unit,” Genghis Capital said last week.
A market analyst, who did not want to be identified, however says the bond is likely to under-perform given that it only gave foreigners two days to decide on whether to buy and it will not be very attractive to local players given there are better products.

“There is a 15-year bond that is trading above 12 per cent in the secondary market yet the coupon for this bond is 11.9 per cent. They needed to compensate for the additional period otherwise you could just wait for them to tap,” said the analyst.
“For local players owning pension funds gives them a tax edge so the tax free nature of the IFB is not really a matter. I think they want to maximise on the very liquid market especially since Treasury said they will go back to the Eurobond market.”
The shilling is keeping policymakers on their toes especially as the import bill also expands and local firms pay dividends.
A market survey by the CBK shows that six out of 10 banks expect the shilling to weaken and the other four expect it to stay put. None expect it to strengthen.
Among private businesses, 49 per cent expect the shilling to weaken, 44 per cent see it holding ground while seven per cent believe it will strengthen.